Industry News
What is a Surety Bondability Letter?
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
When an owner or general contractor is looking to pre-qualify a contractor for a specific project, they will often request the contractor to submit a bondability letter from their bond agent. The bondability letter provides the owner with an assurance that the contractor has been underwritten and approved by a surety company for support of a specific project. The bondability letter is issued for no cost (it is regarded as a standard service provided by the bond agent).
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
When an owner or general contractor is looking to pre-qualify a contractor for a specific project, they will often request the contractor to submit a bondability letter from their bond agent. The bondability letter provides the owner with an assurance that the contractor has been underwritten and approved by a surety company for support of a specific project. The bondability letter is issued for no cost (it is regarded as a standard service provided by the bond agent).
The typical bondability letter contains the following information:
a.) How long the bond company has been providing bonding for the contractor,
b.) The A.M. Best rating of the bond company (typically required to be “A” or above),
c.) Confirms that the bond company is on the U.S. Treasury approved list, and that the bond company is licensed in the state where the work is to be performed,
d.) Provides the single and aggregate bond limits that the bond company will support the contractor,
e.) Includes contact information of the bond agent for follow-up if the owner or general contractor has additional questions.
Although the bondability letter is non-binding and does not provide the same assurance that a bid, performance, or payment bond would provide, it is still a useful pre-qualification tool that does not require the contractor to spend any money.
If you are looking for an inexpensive way to pre-qualify your company with an owner, work with a Rancho Mesa Insurance for assistance with a bond program.
How Warranty Periods Can Impact Bonding
Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.
When we review contracts that require bonding, one area that we need to understand is the warranty obligation. I would expect that over 90% of the contracts that we review for our contractor clients contain a standard one-year warranty term. Since Performance & Payment Bonds respond to the contract, the surety company is also on the hook for this one-year obligation. Premium rates for bonding already include the cost for this one-year warranty in the cost of the performance & payment bond.
Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.
When we review contracts that require bonding, one area that we need to understand is the warranty obligation. I would expect that over 90% of the contracts that we review for our contractor clients contain a standard one-year warranty term. Since Performance & Payment Bonds respond to the contract, the surety company is also on the hook for this one-year obligation. Premium rates for bonding already include the cost for this one-year warranty in the cost of the performance & payment bond.
What if the warranty period exceeds 12 months?
Depending on the warranty wording of the contract, both the contractor and the surety company can be liable for multiple years of warranty obligation. Anytime that the warranty is going to exceed one year, the surety will charge additional rate for each extra year, which increases the cost of the bond, thereby increasing costs for the principle and ultimately the obligee or owner. Second, and most importantly, increased warranty periods could make it more difficult for a contractor to qualify for a bond for that specific job. The longer the warranty period that the bond will be covering, the longer the surety has to try and project how a contractor or company will be doing at that time. Since they have no real way of doing this, it increases their liability for that particular job and could ultimately lead to a declination for the bond.
One option to consider - for a warranty period of longer than one year (but not specifically stated if the bond will respond to the longer warranty period), the contractor should ask for clarification from the obligee for a couple of different reasons. The owner may confirm that the bond does not have to cover the warranty after the initial one-year period. This will make it easier for the contractor to obtain the bond, because the surety will not be required to respond to a warranty claim several years after a job has been completed. It should be noted that this does not mean the contractor is not bound by the full warranty length stated in the contract.
If your company is interested in working on jobs that require bonding, or you are a contractor with an established surety program but have questions about warranty periods, please contact me at Rancho Mesa Insurance Services 619-937-0164 as I can assist with any questions you may have.
Contractor Strategies to Maximize Your Bank Line of Credit
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
Some of my most successful bond clients opened their construction business with a good amount of working experience on their resume, but only a minimal amount of cash and capital. Unfortunately, bond companies like to see a strong amount of cash and capital. Therefore, my goal, as their bond agent, is to work with what they have at the present time to explain why they are a “good risk” now for bid, performance, and payment bonds - along with ideas on how to overcome the initial cash and capital constraints.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
Some of my most successful bond clients opened their construction business with a good amount of working experience on their resume, but only a minimal amount of cash and capital. Unfortunately, bond companies like to see a strong amount of cash and capital. Therefore, my goal, as their bond agent, is to work with what they have at the present time to explain why they are a “good risk” now for bid, performance, and payment bonds - along with ideas on how to overcome the initial cash and capital constraints.
As a contractor grows and is looking at larger single and aggregate bond programs, I make it a point to work with the contractor on upgrading their financial presentation along with the goal to qualify for a Bank Line of Credit. It can sometimes be difficult to qualify for that “first” bank line of credit.
We want to help! On Friday, September, 28th, we will be inviting a local bank professional to cover "Contractor Strategies to Maximize their Bank Line of Credit." Our goal is to answer some of the following questions to prepare the contractor for a favorable submission process with the banker:
a) What is the typical information needed from the Contractor to apply for a Bank Line?
b) How do I determine what size Line of Credit I should ask for?
c) What are the “key” underwriting areas you will concentrate on?
d) How long after we provide you the information should we expect an answer?
e) To qualify for a line of credit – do we need to move our checking account to your Bank?
The seminar will allow us to pull back the curtain with the banker to make this process as seamless and painless as possible. The seminar will provide the contractor an opportunity to ask the questions you might have avoided because you assumed you did not qualify.
If interested, please register online or contact Rancho Mesa Insurance at (619) 937-0164.
How a Bank Line of Credit Can Affect Your Surety Bonding
Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.
When a surety carrier is evaluating a bonding program for a contractor, they use many different underwriting factors to determine an acceptable amount of bond capacity. They will consider a contractor’s working capital, net worth and work in progress schedules, to name a few. Another important factor that can help increase a contractor's bonding capacity is a bank line of credit.
Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.
When a surety carrier is evaluating a bonding program for a contractor, they use many different underwriting factors to determine an acceptable amount of bond capacity. They will consider a contractor’s working capital, net worth and work in progress schedules, to name a few. Another important factor that can help increase a contractor's bonding capacity is a bank line of credit.
The construction industry is very unpredictable and unforeseen issues can arise that may interrupt jobs and cash flow. Surety carriers place such a high value on a bank line because it provides access to cash that may be critical to continuing the day to day operations and survival of the contractor's business.
While bank lines are an important factor that underwriters use, the lines should not be depended upon for frequent use. Dependency on a line can be a sign that the contractor may have some deeper financial issues. Contractors should try to have at least 30 consecutive days during the course of the year, where they do not use their bank line at all.
If your company is interested in working on jobs that require bonding, or you are a contractor with an established surety program but interested in ways to increase the programs limits, please contact me or Matt Gaynor at Rancho Mesa Insurance Services 619-937-0164 as we can assist with any questions you may have.
Case Study: First-Time Bonding for Landscape Professional
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
I recently had the opportunity to work with a new client who is a landscape professional. He wanted to bid on a maintenance project for a local municipality and wasn’t sure if he would qualify for the required performance bond.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
I recently had the opportunity to work with a new client who is a landscape professional. He wanted to bid on a maintenance project for a local municipality and wasn’t sure if he would qualify for the required performance bond.
After a brief discussion of how bonding differs from insurance, we decided to collect some basic information to determine if he would “pre-qualify” for the bond before putting together a full submission. The bond company ran the personal credit of the owner and determined that they would support single bonded projects up to $500,000.
After a careful review of the project specifications, the client decided not to bid on the project. We mutually decided he should provide additional information to the bond company in the event he wanted to bid on a larger project that was going to be released in the following month. The information requested by the bond company included:
a.) Completed contractor questionnaire
b.) Two year-end financial statements or tax returns for the company
c.) A personal financial statement for the owner(s)
Based on the additional information provided, we were able to negotiate a $1,000,000 single project / $3,000,000 aggregate bonding program for this particular landscape professional. The client executed the bond company general indemnity agreement and was off and running to bid the larger projects.
Make sure you work with a professional surety agent who can help assist with the bonding process if you are considering bidding on public works projects. It can save you a lot of time and effort.
Contact Rancho Mesa at (619) 937-0165 if you have any bonding questions.
The Number 1 Reason a CPA Reviewed Financial Statement Can Benefit a Contractor
Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.
One of the key documents required when we are assembling the Bonding Programs for our construction clients is a fiscal year-end financial statement prepared by an outside Certified Public Accountant (CPA). Although we monitor internal financial information from our contractors throughout the year, at the fiscal year-end (usually 12/31), the bond company will require that the statement come from a third party CPA. That way, they have some certainty that the information has been prepared by an independent financial source that has a background in working on contractor financial statements.
Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.
One of the key documents required when we are assembling the Bonding Programs for our construction clients is a fiscal year-end financial statement prepared by an outside Certified Public Accountant (CPA). Although we monitor internal financial information from our contractors throughout the year, at the fiscal year-end (usually 12/31), the bond company will require that the statement come from a third party CPA. That way, they have some certainty that the information has been prepared by an independent financial source that has a background in working on contractor financial statements.
When working with a new client or raising the aggregate program for an existing client, we often discuss recommendations about what type of financial presentation (i.e., compilation or review) they should request from their CPA. From a cost basis, the compilation may save the contractor a few thousand dollars. Here is a description of each financial presentation:
- Compilation - the CPA takes financial data provided by the contractor and puts them in a financial statement format that complies with generally accepted accounting principles. There are no testing or analytical procedures performed during a compilation.
- Review - inquiries and analytical procedures present a reasonable basis for expressing limited assurance that no material modifications to the financial statements are necessary and they are in conformity with generally accepted accounting principles.
As a bond agent, I have noticed the historical decision point for when bonding companies ask for a contractor to upgrade to a review is when the single job size they are bidding exceeds $500,000. Of course, we have many exceptions to this rule:
a. If the contractor rarely requires bonding and will only need an occasional $600,000 - $700,000 bond, a compilation is more than acceptable.
b. If the contractor has strong internal financial statements and only requires a bond less than $1,000,000 every few years.
c. If the contractor has a very strong cash position and a solid personal financial statement several sureties will require copies of tax returns but may waive the requirement for a CPA issued statement.
On the flip side, on several occasions we have used the future requirement that they upgrade to a CPA review at their fiscal year-end to provide approval for a bond they need now. Under that scenario, both the bond company and the contractor have an understanding in place that the request for an upgraded financial statement will allow a positive approval to increase the bonding capacity in advance of the fiscal year end.
Keep in mind, it would be also be prudent to check with your bank to determine what level of financial statement they may require.
In closing, for contractors looking to grow their business, it is best to provide a CPA review (and pay the extra money) then to risk not getting approved for that larger project or increased program. It can also help to have a review as the owner starts to get a little further away from the numbers and they can get some level of comfort with a review as to the strength of their accounting system.
Talk to your bond agent and CPA now, to ensure all three parties are on the same page.
For more information about surety bonding, contact Rancho Mesa Insurance Services, Inc. at (619) 937-0164
Small Performance Bonds No Longer Require CPA Financial Statements
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
In the past, many Surety Bond carriers required financial statements from a Certified Public Account (CPA), bank lines of credit, tax returns, etc. for contractor bond programs, whether the client required one bond a year or a large bond program. This is no longer the case.
Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.
In the past, many Surety Bond carriers required financial statements from a Certified Public Account (CPA), bank lines of credit, tax returns, etc. for contractor bond programs, whether the client required one bond a year or a large bond program. This is no longer the case.
Several “A” rated carriers now provide “personal credit based scoring” to approve single bonds of $350,000 up to $500,000. There is no need for company financial statements. Instead, the contractor completes a “fast track” application, which requests personal financial information about the owner(s). The bond company will run the personal credit of the owner(s). If the owner(s) personal credit is decent, the bond will be approved. A response is provided within 48 hours of submission.
The program responds to requests for bid bonds, performance and payment bonds, and letters of bondability. Several carriers provide a “pre-qualification” feature so you can determine if you will qualify for the bond before you bid or negotiate a project that will require a bond. This pre-qualification feature is helpful for owners that are aware they have low credit scores.
So, if you are considering a project that requires a bond and you are not a big fan of collecting a lot of paperwork for one project – don’t fret. We may have a solution to help you win that job!
Contact Rancho Mesa Insurance Services, Inc. at (619) 937-0164.
Increase Bonding Capacity Through Jobsite Pictures
Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.
A picture may be worth a thousand words, but it can also be worth hundreds of thousands of dollars when it comes to bonding a new construction project. Let me explain the bonding process and how a few pictures can free up a contractor's bonding capacity.
Author, Matt Gaynor, Director of Surety Bonding, Rancho Mesa Insurance Services, Inc.
A picture may be worth a thousand words, but it can also be worth hundreds of thousands of dollars when it comes to bonding a new construction project. Let me explain the bonding process and how a few pictures can free up a contractor's bonding capacity.
For Construction Bonding Programs, we typically provide a Single Project Limit and an Aggregate Surety Program to guide our clients with pre-approved parameters they can use to bid on projects that require bonding. Although many factors come into play when providing a single project limit, the general rule is 1½ times the largest project completed to date.
The Aggregate Program is made up of the “Cost to Complete” for all bonded and non-bonded projects the contractor has open. To compute the cost to complete, take the estimated cost of the project less the cost to date listed on the work in progress schedule.
One way the agent and bond company can check on the progress of a particular project is by sending a status form to the owner or general contractor. The status form is used to determine how much work has been completed to date. It also includes a comment section to report any problems on the project.
Proving a project is progressing is highly important for a contractor, since it can free up their bonding capacity and allow them to get bonding on additional projects. But, what happens when the owner of a project doesn't return the status form in a timely manner and the contractor needs to free up bonding capacity in order to get bonding on another project?
Case Study
Recently, Rancho Mesa was looking for a way to fit a new bonded project into a contractor’s aggregate program, which was almost at capacity.
In an effort to speed up the process of releasing bonding capacity, the contractor provided pictures (from various angles) of one of his current bonded projects. The pictures showed that several sections of the project were complete. This allowed Rancho Mesa to confirm with the bond underwriter that over 60% of the project was complete. Thus, the underwriter was able to release over $750,000 of capacity to be used on the new project that required bonding.
While the preferred method to release bonding is to get a signed status report from the owner; sometimes, a few pictures from the jobsite can help quicken the process, while we wait for the signed document.
For questions about Surety, contact Rancho Mesa Insurance Services, Inc. at 619) 937-0164.